The second quarter is off to a great start, with more than $3 billion in catastrophe bonds announced or completed so far. And as the insurance and reinsurance industry prepares for hurricane season, the momentum should continue. Yet issuance volume is only part of what has made the catastrophe bond market interesting this year. A number of new developments show that the sector is ready for continued growth.
1. Big Bosphorus: Bosphorus 1 Re, exposed to earthquake risk in Turkey, started as a $100 million transaction and upsized to $400 million in only a few weeks. Bringing a rare opportunity for geographic diversification (in a market still largely exposed to U.S. natural catastrophe risk), the size and upsizing speed show just how substantial investor appetite is — and how willing investors are to explore new opportunities.
2. Mixed Indemnity: While indemnity-triggered deals have become more common, concern about moral hazard persists. Tar Heel Re, a large transaction at $500 million, is using PCS® for catastrophe designation, bringing in an independent third party to reduce moral hazard. With that approach, the sponsor includes only claims from a catastrophe event that has a PCS catastrophe serial number, preventing the use of other claims from driving up losses and triggering the bond.
3. Publicly Managed Entities: Both Citizens Property Insurance Corporation and Louisiana Citizens have returned to the capital markets after debuting in 2012. The former sponsored its second Everglades Re transaction at $250 million, following its initial $750 million catastrophe bond last year (the second largest in the history of the market). The second Louisiana Citizens Pelican Re transaction (after last year’s $125 million deal) started at $100 million and has since upsized to $140 million.
4. Frictional Costs: Long a problem for the ILS sector, frictional costs are declining. That should make the capital markets more accessible to both existing players (note the return of Allstate with Sanders Re and its unique use of PCS data) and new entrants, particularly the midmarket. PCS remains committed to increasing the accessibility of the ILS sector and continues to work with sponsors and their advisors to help manage frictional costs.
5. Continued Growth: This year is on track to reach $4 billion in catastrophe bond issuance by the end of the first half. To put that in perspective, the first two quarters would be among the most active in the market’s history. In fact, 2013 could ultimately surpass 2007 as the busiest issuance year on record. With increasing sponsor and risk diversity, continued trigger innovation, and declining frictional costs, the base for future growth is still expanding.
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